legal aspects of business digest

8/12/2019 Legal Aspects of Business Digest

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LEGAL ASPECTS OF BUSINESS

INDEX

NO. CONTENTS PAGE NO

1 INDIAN CONTRACT ACT,1872 1-27

2 SPECIAL CONTRACTS 28-53

3 INDIAN COMPANIES ACT, 1956 5-80

NEGOTIABLE INSTURMENT ACT, 1881 81-89

5 SALE OF GOODS ACT,1930 90-96

6 CONSUMER PROTECTION ACT,1986 97-106

7 INFORMATION TEC!NOLOG" ACT, 2000 107-11

8 T!E PATENTS ACT,1970 115-119

9 T!E TRADE MAR#S ACT 120-126

10 T!E COP"RIG!TS ACT,1957 127-133

11 EN$IRONMENT PROTECTION ACT 13-139

12 PRACTICAL PROBLEMS AND SOLUTIONS 10-16

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INDIAN CONTRACT ACT, 1872

Q1. Define Contract. Explain the essential elements of a valid contract?

A1.

Contract in simple language is called an Agreement. Sec: 2(h).

An agreement enforceable by Law is a contract. According to Salmond: - An agreementcreating legal obligations between the parties is called contract. Thus we can say that

C!"#AC" $ A%#EE&E!"' E%A *%A"*! A%#EE&E!":+ Sec 2(c)

!ery promise and e!ery set of promises" forming the consideration for each other" is anagreement.

Agreement is an accepted offer when accepted becomes an Agreement. Therefore

A%#EE&E!"$ ,,E# ' ACCE-"A!CE

C!"#AC" $ ,,E# ' ACCE-"A!CE ' E%A *%A"*!

o Thus !ery Contracts are agreements but all agreements are not contracts. #n order to

ma$e a !alid Contract" the parties must ha!e intention to create legal relationship. Theremust be legal enforceability of an Agreement then only it can became a !alid Contract.

o %hen the parties ha!e no intentions to create legal relations" the Agreement is mere a

social agreement or domestic Agreement or a friendly Agreement. &or e.g. ' in!ites ( toa Tea party. ( accepts the ) and reaches to the place. ' is not found there" now ( cannotsue against ' because the parties do not ha!e any intention to create legal relationship.*ere Agreement was mere &riendly Agreement. +oreo!er" According to Section ,/ Acontract which ceases to be enforceable by law becomes !oid when it ceases to beenforceable.

/o0 Contract is made -ossile?

,,E# -#-SA

%hen one party as$s to do something he is said to ha!e made an offer.

According to Section ,a/ %hen one person signifies to another his willingness to do or to

abstain from doing anything" with a !iew to obtaining the assent of that other to such act orabstinence" he is said to ma$e a proposal.

ACCE-"A!CE

According to Section ,b/%hen one person to whom the proposal is made" signifies his accent there to the proposal issaid to be accepted. A proposal when accepted becomes a promise.

,,E# ACCE-"A!CEmay be#. by oral

##. by written

###. by conduct

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ESSE!"*A EE&E!"S , A 3A*D C!"#AC"

0/ ,,E# ACCE-"A!CE: + 42(a)5 2()6

There must be minimum two parties entering into a Contract.

)ne party is offeror and other is Acceptor.

)ffer when accepted becomes an Agreement.

Such an )ffer and Acceptance must be !alid and not illegal. The terms of )ffer must be definite 1 certain.

)ffer may be conditional.

)ffer may be specific or general.

)ffer 1 Acceptance may be --- )ral" %ritten or by conduct

&or e.g.: - A as$s to 2 %ell you sell me your Scooter at 3s.,4"4445. 2 said (es.

This is an )ral offer 1 Acceptance. #t is a !alid Contract.

,/ E%A E!,#CEA**"7: +

An Agreement nforceable by Law is Contract. Section 6,h/7.The agreement

becomes a contract only if it is legally enforceable. According to Section ,/.A Contract which ceases to be enforceable by law"

becomes !oid when it ceases to be enforceable.

Also an agreement ha!ing no intention to create legal rights 1 obligations are mere

Social Agreements or 8omestic Agreements or &riendly Agreements. &or e.g.: - Anin!itation to a &riend for a cup of tea is not a C. #t is mere friendly Agreement.

,or e.8.: + *n alfo9r 3s alfo9r: A husband promised his wife to pay his wife a

household allowance of 9 4 e!ery month. Later" the husband failed to pay the amount.The wife sued for Allowance. *eld" Ag. %as not ha!ing any intention to create legalrelations" it was mere 8omestic Agreement.

/ A,; C!S*DE#A"*!: +

The Agreement to be enforceable by Law" must be supported by consideration.

Consideration means something in return of something ;uid ualified by law.

@/ ,#EE C!SE!": + 6S:0 to 0B ,4 to ,,7

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#t is essential that the consent obtained must be free.

According to Section 0 " Two or more persons are said to consent when they

agree upon the same thing in the same sense.

According to Section 0= : Consent is said to be &ree when it is not caused by ---

a. Coercion" as defined in section: 0@" orb. ?ndue influence" as defined in S:0" or

c. &raud" as defined in S:0D" or d. +isrepresentation" as defined in S:0" ore. +ista$e" subect to the pro!isions of Sec: ,4",0 and ,,.

Consent obtained without &ree Consent is not enforceable.

/ A,; 6

The Agreement must be capable of being performed. An Agreement. to do an

impossible act is !oid. 6Sec:@7

&or e.g.: - A agrees with 2 to put life into 2Gs dead wife" the agreement. is !oid as it is

impossible to perform.

04/ S/;D !" E 3*D : + 4S: 2> to @6

The Agreement. must not be eFpressed declared be !oid.

&ollowing are some Ag. which are eFpressly declared to be !oid: -A. Agreement in restraint of marriage 6S:,72. Agreement in restraint of legal of Trade 6S:,D7C. Agreement in restraint of legal of


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Q2. hat do o9 mean offer? Explain the essentials of valid offer?

A2.

&eanin8: At the formation of e!ery agreement there must be definite offer by one person toanother and its un>ualified acceptance by the person to whom the offer is made. An offer is a

proposal by one party to another party to enter into a legally binding agreement with him.

Definition: Accordin8to BSection 2(a)A person is said to have made a proposal5 0hen he Hsignifies to another his 0illin8ness todo or astain from doin8 anthin85 0ith a vie0 to otainin8 assent of that other to s9ch

an act or astinence.

Example: IAI says to J2I" H%ill you purchase my car for 3s @4"444K-. IAI" in this case" isma$ing an offer to J2I as he signifies to I2I his willingness to sell his car to J2I for 3s@4"444K-" with a !iew to obtaining 2Is assent to purchase the car.

The person ma$ing the offer is $nown as the offeror" and the person to whom the offer ismade is called the offeree or proposee. %hen the offeree accepts the offer" he is called theacceptor or promisee. BSection2(c)

Essentials of a valid offer: A !alid offer must comply with following rules.

0. ffer m9st e capale of creatin8 le8al relationship: An offer must be of such anature as would result in a !alid contract when accepted by the party to whom it is made.A social in!itation" e!en if it is accepted" does not create a legal relationship because it isnot so intended. #n other words in!itation to a friend for a cup of tea is a mere socialin!itation and as such an in!itation" e!en if accepted" does not create legal relations.

,. "he terms of offer m9st e definite and certain: The terms of offer must be definite"unambiguous and certain and not loose and !ague. #f the terms of an offer are !ague itsacceptance cannot create contractual relationship.

. "he offer m9st e comm9nicated: An offer to be complete must be communicated tothe person to whom the offer is made. ?nless an offer is communicated" there can be noacceptance of the offer. An acceptance of the offer in the ignorance of the offer is noacceptance and does not confer any right upon the acceptor.Case a0: alman 3. %a9ri D9tt

,acts: sent his ser!ant L in search of his missing nephew. then announced a rewardfor information concerning the boy. L traced the boy in the ignorance of any such

announcement. Subse>uently" when he came to $now of this reward" he claimed it.Decision: #t was held that he was not entitled to the reward" as an acceptance of the offerin the ignorance of the offer is no acceptance.

=. "he offer ma e conditional: A proposer is at liberty to ma$e an offer subect tocertain conditions. #f the conditions are properly communicated so that the offeree shouldha!e $nown them" he cannot plead the ignorance of the conditions and such conditionswill be binding to the offeree.

@. "he offer ma e 8eneral or specific: %hen the offer is made to a definite person orany class of the persons it is called specific offer. #t can be accepted by the person towhom it is made. )n the other hand when the offer is made to general public at large it is

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called general offer. #t can be accepted by any person. #f the certain person accepts it thanit results in to a !alid contract.

. "he offer m9st e made 0ith a vie0 to otainin8 assent: An offer must beaddressed to another person with a !iew to obtaining his assent thereto and therebycreating legal relationship between them. %hen it is made merely with a !iew todisclosing the intention of ma$ing an offer" or is made for soliciting information" it is notan offer.

D. ffer m9st thr9st the 9rden of acceptance: )ffer should not contain a term" Hnon-compliance of which" may be assumed to amount to acceptanceH. Thus" a man cannot saythat if he fails to hear from the other party within a wee$" he shall consider the offer as

being accepted.

. Statement of -rice is not an offer: Tender or a price list is not an offer. #t is only amere in!itation to an offer.

E. A9ction is not an offer: The person shows intention to certain goods. )ne who bidsprice is said to ha!e made the offer. %hether to accept such amount is the discretion ofthe person who puts the articles for auction.

Q. Define the term acceptance? Disc9ss the essentials of valid acceptance?

A.

&eanin8: An agreement emerges from the acceptance of the offer. )ffer creates no legalrights until acceptance. Acceptance is an eFpression by the offeree of his willingness to be

bound by the terms of the offer.

Definition: According to Section 2() of the #ndian Contract Act" 0D,. HThe proposal is said

to be accepted when the person to whom the proposal is made signifies his assent thereto. Aproposal when accepted becomes a promise.H Acceptance can be gi!en by eFpress wordsspo$en" in writing and by conduct.

M Essentials of 3alid Acceptance.

0. Acceptance m9st e asol9te and 9nF9alified: An acceptance must be absoluteand un>ualified of all the terms of the offer. A conditional acceptance is no acceptance.&or e.g. ' ma$es the proposal to gi!e a pen for 3s.@4. ( agrees to purchase on acondition to gi!e money after two months. This is the case of conditional acceptance andas stated abo!e conditional acceptance is no acceptance.

,. *t m9st e expressed in some 9s9al manner: #f the offeror prescribes the modeof acceptance the acceptance must be gi!en accordingly" e.g. if the offeror says" H%ire3eplyH and the reply is sent by post" there is no acceptance of the offer. Thus acceptancemust be according to the mode prescribed by the offeror.

. *t m9st e the part named in the offer: An offer made to a particular personis to be accepted by him alone" because he is the only party intended to accept. *owe!er"if it is made generally" any member of the public may accept it. Fample: % offers byad!ertisement a reward of @ pounds to anyone who will bring his lost dog. Any memberof the public can accept this offer.

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=. An acceptance m9st e comm9nicated to the offeror: The acceptance must becommunicated to the offeror. The acceptor should signify his intention to accept the

proposal. +ere mental acceptance is no acceptance. #t must be e!idenced by words or byconduct. &or e.g. T ma$es proposal to S to purchase the house. S says to his relati!es thatsale of house is made. TIs proposal is not said to ha!e been accepted. As S informed hisrelati!es about the sale of the house and not the offeror T about it. 2esides this"acceptance can be communicated by post also. Communication of acceptance by post isconsidered to be complete as against the proposer as soon as the letter of acceptance is

posted.

@. Acceptance can e made acceptin8 consideration: An offeree recei!esconsideration shown in the proposal. #t is acceptance of the proposal. .g.: < informs ;that his house rent is 3s. D44K- instead of 3s. @44K- ; pays rs.D44K- here" ; accepted the

proposal of ualified from contracting by anylaw to which he is subect.

*ence following are not competent to enter into a contract : -

+#N)3S

?NS)?N8 +#N8

8#S;?AL# 2( LA%.

&*!#S

According to #ndian +aority Act: 0D@" Sec:

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!ery person domiciled an #ndia is deemed to ha!e attained his maority when he hascompleted his age of 0 years and not before.

#9les H a0s for &inorIs A8reement:+

1) &inorIs A8 is Void ab intio

oToday an agreement with or by a minor is !oid and inoperati!e abintio. &ormerly it

was not so.

ouently" the +inor sued for setting aside the mortgage" stating that she wasunder-aged when he made a mortgage.

o*eld" the mortgage was cancelled and the Contract was !oid.

2) A &inor can e a promise or a eneficiar

oThere is nothing which depri!es a minor from becoming a beneficiary.

oThus an Agreement under which a +inor in whose fa!our a mortgage has been

eFecuted can be enforced by law.

oSimilarly" a promissory note eFecuted in fa!our of a minor can be enforced.

o*e can draw" negotiate or endorse a negotiable instrument.

) !o #atification (approval)

oA minor on attaining maority cannot ratify an Agreement entered into while he was a

minor

oSince minorGs Agreement is !oid ab initio" it cannot be !alidated by any subse>uent

action.

o&or eg :- A uirement at the time of sale anddeli!ery

oNecessaries may also be teaching" medical legal ad!ice" etc.

=) !o Estoppel

oA +inor falsely representing himself of age of maority has induced a person to enter

into a Contract with him" can any time plead his minority" as defense

oThere cannot be estoppel against a minor.

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oThus" a Contract entered into by a +inor is a complete nullity.

>) !o #estit9tion or Compensation

o#f a +inor has recei!ed any benefit under a !oid Agreement" he cannot be as$ed to

compensate for it.

oSec : @ to restore or compensate does not apply for minor

o&or eg: - +" a minor obtains loan by mortgaging the property. +inor is not liable torefund the loan. Not only this" e!en mortgaged property cannot be made liable to payfor the debt. 6+ohribibi !Ks 8harmadas ghose P0E47

J) !o Specific -erformance

oThere can be no specific performance of the Agreement entered into by a m as they

are !oid ab initio.

o#f a person after attaining maority pays a debt incurred during his minority" he cannot

subse>uently bring a suit for the refund of this amount.

K) !o *nsolvencoA minor cannot be adudged insol!ent

oThis is because he is incapable of contracting debts.

L) &inor as a -artner

oA minor cannot become a partner in his own right as he is incapable of entering into

Contract under section 00.

o2ut a m maybe entered into the benefits of a partnership with the consent of other

partners. 6Sec :4 of


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o&or eg : #n the case of uirements to support a Contract.

o #t is the sign and symbol of e!ery bargain.

o Consideration means Jsomething in return of somethingG

o #n Latin" it is >uid pro >uo

o An agreement without consideration is normally !oid.

o Consideration is the cause of all promises.

o An Agreement without consideration is a base of na$ed promise and ex nudo pacto

non oritio action i.e.:- cannot be held to be binding upon the parties

o &or eg: A agrees to sell his car to 2 for 3s.@4" 444. Car is consideration for 2 and 3s.

@4"444 is consideration for A.

o According to section:, d/ :- %hen at the desire of the


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o !en a stranger to Consideration Can sue on the Agreement.

o *owe!er" Stranger to contract cannot such on the Agreement.

o &or eg B #n the case of Chinnaa vs #amaa P1KK2

An old lady '" by a deed of gift made o!er certain property to her daughter (" underthe direction that she (/ should pay her aunt Q sister of old lady '/" a certain sumof money e!ery year. The same day daughter ( entered into an Agreement with aunt

Q to pay her agree amount. Later" daughter ( refused to gi!e money on agreement thatno consideration was passed from aunt Q to daughter (. *ence it is not Contract.*owe!er" it was held that consideration may mo!e from the promise or any other

person. *ence Consideration *ad already been passed from old lady ' to daughter (.*ence Q is stranger to Consideration but not stranger to contract. Therefore she isentitled to get money from daughter (.

) *t ma e past5 -resent or f9t9re

o The words in Sec :, d/

RR has done or abstained" or does or abstainsB or promises to do or abstain fromdoing R..

o #t indicates that Consideration according to types. #t may be P


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o &or eg. A agree to sell a horse worth 3s.04" 444 &or 3s.044. AGs consent was freely

gi!en. The Agreement is Contract in spite of the inade>uate consideration.

=) *t m9st e #eal and not *ll9sor

o The consideration to be !alid must be real and not be illusory or sham.

o The following considerations are not 3eal.

uirethe amount as Consideration was illusory they were already under obligation to bringthe !essel home.

>) *t m9st not e *lle8al5 *mmoral or opposed to p9lic polic

o Consideration i!en must be lawfulo %here Consideration is illegal" immoral or opposed to public policy" the courts do not

allow an action on such contract. 6Sec :,7

o No Consideration No Contract

o According to section: ,@" An Agreement without consideration is normally !oid.

o eneral rule is that if there is no Consideration There cannot be a contract.

o According to Salmond : A promise without Consideration #s a gift

o ?nder 3oman Law : An Agreement without Consideration #s nudum pactum na$ed

agreement/

o *owe!er" there are eFceptions to the general 3ule No Consideration No Contract.

ECE-"*!S " "/E #;E: N! C!S*DE#A"*! ! C!"#AC"O

o The following are cases where a Contract is enforceable e!en if there is no

consideration :-0/ Natural lo!e 1 Affection 6sec :,@ 0/7,/ Ooluntary Ser!ices 6,@,/7/ To pay a time-barred debt 6,@/7=/ Agency 60@7@/ Completed gift 6Fplanation :0 sec :,@7

1) !at9ral love Affection :+ 42=(1)6

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o According to section : ,@0/

%here an agree is eFpressed in writing and registered under the law for the time beingin force for the registration of documents and is made on account of natural lo!e andaffection between the parties standing in a near relation to each other is enforceablee!en if there is no consideration

o #ngredients of section :,@ 0/ :-

0. The parties to agreement must stand in near relation to each other.,. Agreement must be made on account of natural lo!e and affection. Agreement should be in form of a written document=. 8ocument must be registered.

o &or eg :- *n case of #aMl9Rh Devi vs hootnath P1L@@

An Agreement entered into by husband 2hootnath with his wife 3alu$hy during>uarrels and disagreements" whereby 2 promised to gi!e some property to wife 3.*ere Agreement is !oid because parties do not ha!e natural lo!e and affection thoughthey are husband and wife.

2) 3ol9ntar Services :+ 42= (2)6

o According to section : ,@,/ :-%here it is a promise to compensate wholly or in part" a person who has already!oluntarily done something for the


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Q>. Define consent. hen consent is said to e free?

A>.

o Consent in general" means an agreement.

o Accordin8 to section 1 :Two or more persons are said to consent when they agree upon

the same thing in the same sense.

o Accordin8 to section 1G :Consent is said to be free when it is not caused by : -

0. coercion as defined in sec. 0@" or ,. undue influence as defined in sec. 0" or . fraud as defined in sec. 0D" or =. misrepresentation as defined in sec. 0" or @. mista$e" subect to the pro!isions of sec. ,4" ,0 and ,,.

o #f there is no consent" there is no contract.

o %hen the consent is caused by coercion" undue influence" fraud or misrepresentation"

then the contract becomes !oidable.

o %hen the consent is caused by mista$e" then the contract becomes !oid.

o *ence" the following are the possible alternati!es when the consent is not free :

1) Coerciono %hen the person is forced to enter into a contract under a threat" it is said coercion

o Accordin8 to section 1= :Coercion is committing" or threatening to commit" any act

forbidden by the #ndian


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2. the acti!e concealment of a fact by a person ha!ing $nowledge or belief of thefact

. a promise made without any intention of performing itG. any other act fitted to decei!e=. any such act or omission as the law specially declares to be fraudulent.

G) &isrepresentation

o +isrepresentation is a false statement which the person ma$ing it honestly belie!es to

be true or which he does not $now to be false..

o Accordin8 to section 1K: There is a misrepresentation P

1. %hen a person positi!ely assets that a fat is true when his information doesnot warrant it to be so" thought he belie!es it to be true.

2. %hen there is any breach of duty by a person which brings an ad!antage to theperson committing it by misleading another to his preudice.

. %hen a party cause" howe!er" innocently" the other party to the agreement toma$e a mista$e as the substance of the thing which is the subect of the agreement.

o +isrepresentation is also called an innocent fraud.

=) &istaRe

o +ista$e is erroneous belief about something or +ista$e may be a/ of law" or b/ of fact.

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QJ. hat is performance of contract? Disc9ss the provisions relatin8 to performance of

contract 9nder *ndian Contract Act5 1KJ2?

AJ

&EA!*!% , -E#,#&A!CE

The term IperformanceI means that the parties to the contract ha!e fulfilled or carried out theirrespecti!e obligations arising out of the contract. &or eFample" A contracts to sell his boo$ to2 for 3s. @4. A deli!ers the boo$ and 2 ma$es the payment" the contract is discharged by

performance.

Section Jof the #ndian Contract Act lays down the obligations of the parties regardingperformance. #t pro!ides that" the parties to a contract must either perform" or offer toperform" their respecti!e promises" unless such performance is dispensed with or eFcusedunder the pro!ision of this Act" or any other law.

"7-ES , -E#,#&A!CE

&rom Section D it can be inferred that the performance may be either actual or attempted.

Act9al performance: %hen a party to a contract has done" what he had underta$en to do andthere remains nothing to be done by him the promise is said to ha!e been actually performedand the liability of such a party comes to an end. &or eFample A who is indebted to 2 for 3s.0"444" promises to repay the amount after two months. A repays the amount on the due date.This is actual performance. .

Attempted -erformance: Sometimes" when the performance becomes due" the promisoroffers to perform his obligation but the promisee refuses to accept the performance. This is$nown as Iattempted performanceI or tender. &or eFample" A. promises to deli!er certaingoods to 2. A ta$es the goods to the appointed place during business hours but 2 refuses tota$e the deli!ery of goods. Thus" A has done what he was re>uired to do under the contract" #t

is an attempted performance. #n case of an attempted performance" the promisor shall not beheld liable for non- performance as an attempted performance or tender is as good as

performing the contract.

Section Kof the Contract Act pro!ides. %here a promisor has made an offer of performanceto the promisee" and the offer has not been accepted" the promisor is not responsible for non

performance" nor does he thereby lose his rights under the contract.

*!DS , "E!DE#

Tender or attempted performance can be of two types i/ tender of goods and ser!ices and ii/

tender of money.

"ender of 8oods and services: A. contract to deli!er goods or render some ser!ice iscompletely discharged when the goods are tendered for acceptance according to the terms ofthe contract. #f the goods or ser!ices are refused" they need not be offered again and the

promisor is discharged from his liability. At the same time" he may file a suit against thepromisee for non-acceptance.

"ender of mone:%here the debtor promisor/ ma$es a !alid tender i.e." offers to pay theamount to the creditor and the creditor refuses to accept the same" the debtor is notdischarged from his liability to pay the amount. #n other words" a tender of money does notamount to discharge of the debt. The debtor continues to be liable for the payment of debt.

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2ut" the debtor will not be liable for interest from the date of a !alid tender i.e." no interestshall become payable from the date of the reection of a !alid tender of money.

E,,EC" , #E,;SA " -E#,#& -#&*SE /7

%hen a party to a contract has refused to perform" or disabled himself from performing hispromise in its entirety" the promisee may put an end to the contract. 2ut" if the promisee hassignified by words or conduct" his ac>uiescence in the continuation of the contract" he cannotterminate it.&or eFample" A5 a singer" enters into a contract with " the manager of a theatre" to sing at histheatre two nights e!ery wee$ during the neFt two months" and engages to pay her at therate of 3s. 044 for each night. )n the siFth night A willfully absents herself from the theatre.#n such a situation" is at liberty to put an end to the contract"#f howe!er" with the consent of " A sings on. the se!enth night" has signified hisac>uiescence in the continuation of the contract and" therefore" he cannot now put an end toit. of course" is entitled to compensation for damage sustained by him through ATsfailure tosing on the siFth night.

/ CA! DE&A!D -E#,#&A!CE?

-romisee: Normally" the promisee is the only person who can demand performance of thepromise under a contract. A third party cannot demand performance of the contract e!en if itwas made for his benefit. &or eFample" A .promises 2 to pay 3s. @44 to C. The person whocan demand performance is 2 and not C.

e8al #epresentative: #n the case of death of the promisee" his legal representati!e candemand performance" unless a contrary intention appears from the contract or the contract" isof a personal nature. &or eFample" A agrees to marry 2. *owe!er" before marriage ta$es

place. 2 dies. Since it is a contract" of personal nature the legal representati!e of 2 cannot

demand performance of the promise from A.

"hird -art:#n some eFceptional cases" the third party can also demand performance of thecontract e!en though he is not a party to the contract.


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parties that the promise should be performed by the promisor himself" such promise must beperformed by the promisor. This usually applies to contracts in!ol!ing personal s$ill" taste orart wor$. &or eFample" A promises to paint a picture for 2. As this promise in!ol!es personals$ill of A" it must be performed by A.

-romisor or A8ent:%here the contract does not in!ol!e personal s$ill of the promisor" thecontract could be performed by the promisor himself or by any competent person employed

by him for the purpose" &or eFample" A promises to I pay to 2 a sum of money" A mayperform this promise either by paying the money personally to 2 or by causing it to be paid to2 by his authoried agent.

e8al #epresentatives:The contracts which do not in!ol!e any personal s$ill or taste maybe performed by his .legal representati!e after the death of the promisor. &or eFample" Apromises to deli!er goods to 2 on a certain day on payment of 3s. ,"444. A dies before thesaid day. AIs legal representati!es are liable to deli!er the goods to 2 and 2 is bound to pay3s. ,"444 to AIs representati!es. #f" howe!er" the contract in!ol!es some personal s$ill ortaste" it comes to an end with the death of the promisor.

"hird -erson: #n some cases" a contract may be performed by a third person pro!ided thepromisee accepts the arrangement. According to Section =0" once the promisee accepts theperformance from a third person" he cannot compel the promisor to perform the contractagain.

-erformance of uestion Iwhat is a reasonable timeI is" in each particular case" a>uestion of fact. Thus"it is clear from this pro!ision that if time for performance is not stated"the contract is not bad for want of certainty.

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-erformance of promise 0here time is specified:Sometimes" the time for performance isspecified in the contract and the promisor has underta$en to perform it without anyapplication or re>uest by the promisee. #n such cases" the promisor must perform his promiseon that particular day during the usual hours of business and at a place where the promiseought to be performed (Section GJ).

-erformance of promise on application the -romisee:#t may also happen that the dayfor the performance of the promise is specified in the contract but the promisor has notunderta$en to perform it without application or demand 1 by the promisee. #n such cases" the

promisee must apply for performance at a proper place and within the usual hours ofbusiness. (Section GK)

-erformance of promise 0here no place is specified and also no application is to e

made promisee:%hen a promise is to be-performed without application or demand bythe promisee" and no place is specified for performance" then it is the duty of the promisor toapply or as$ the promisee to fiF a reasonable place for the performance of the promise and to

perform it at such place (Section GL).&or eFample" A underta$es to deli!er 0"444 $ilos of

ute to 2 on a fiFed day. A must apply to 2 to fiF a reasonable place for the purpose ofrecei!ing it" and must deli!er it to him at such place.

-erformance of promise in the manner and time prescried or sanctioned promisee:

Sometimes the promisee himself prescribes the manner and the time of performance. #n suchcases" the promise must be performed in the manner and at the time prescribed by the

promisee. The promisor shall be discharged from his liability if he performs the promise in-the manner and time prescribed by the promisee (Section =@).Examples

i/ 2 owes A 3s. ,"444.A desires 2 to pay the amount to AIs account with C, a ban$er. 2" whoalso has an account with 2an$ C" orders the amount to be transferred to AIs credit and this is

done by the ban$er. Afterwards" and before A $nows of the transfer" the 2an$ C fails. Therehas been a good payment by 2 and he is discharged from his obligation. ii/ A desires 2" whoowes him 3s. 044" to send him a note for 3s. 044 by post. The debt is discharged as soon as2 puts into the post a letter containing note duly addressed to A.

A--#-#*A"*! , -A7&E!" , DE"

%here a debtor owes se!eral distinct debts to the one and the same creditor and ma$es apayment towards those debts" the >uestion may arise as to which of this particular debt" thispayment is to be appropriated.The rules regarding Appropriation of payments are laid under section @E" 4 and 0.There are aspects: -

DetorIs #i8ht: + 4S: =L6

#f the 8ebtor eFpressly intimates at the time of actual payment" that the payment should beapplied towards the discharge of a particular debt" then the creditor must do so. #f the creditordoes not agree to the proposed Appropriation" he must refuse to recei!e the payment. +aFimhere is" when money is paid" it is to be applied according to gi!er not the recei!er. *owe!er"this section will not apply to a single debt payable in installments.

CreditorIs #i8ht: + 4S: >@6

%here the 8ebtor does not eFpressly intimate or where the circumstances attending onpayment do not indicate any intention" then the creditor may apply at his discretion to anylawful debt actually due and payable to him from the debtors. The Creditor may alter the

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appropriation until he has declared the appropriation to the 8ebtor. *owe!er" Creditor cannotapply the payment to a disputed or unlawful debt" but he may apply it to a debt which is

barred by the Law of Limitation. %hen #nterest and


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A owes 2 3s. 04"444. A enters into an agreement with 2 and gi!es 2 a mortgage ofhis estate for 3s. @"444 in place of the debt of 3s. 04"444. This arrangementconstitutes a new contract and terminates the old.

#escission: 3escission means cancellation of the contract. #f by mutual agreement thecontracting parties agree to rescind the contract" the contract is discharged. A contract can berescinded before the performance becomes due. Non-performance of a contract by both the

parties for a long period" without complaint" amounts to implied rescission. #escission isdifferent from novation in the sense that in case of novation a ne0 contract is

s9stit9ted for the ori8inal contract 0hereas in rescission the ori8inal contract is

cancelled and no ne0 contract is made.

Alteration:#t means a change in one or more of the terms of a contract with consent of allthe parties. Alteration has the effect of terminating the original contract. #n an alteration thereis a change in the terms of a contract but no change of parties to it. #n no!ation there may bechange of parties.

#emission:#t means the acceptance of a lesser sum than what was contracted for or a lesser

fulfillment of the promise made. According to section 5 e!ery promisee may remit or dispense with it" wholly or in part" or

eFtend the time of performance" or

accept any other satisfaction instead of performance.Example:

A owes 2 3s. @"444. A pays to 2 3s. "444 who accepts it in full satisfaction of the debt. Thewhole debt is discharged.

aiver: %ai!er means abandonment or intentional relin>uishment of a right under thecontract. %hen a party wai!es his rights under it" the other party is released from hisobligation. &or eFample" A promises to paint a picture for 2. 2 afterwards forbids him to do

so. A is no longer bound to perform the promise.

D*SC/A#%E 7 A-SE , "*&E

The rights and obligations under a contract can be enforced only within a specified periodcalled the Iperiod of limitationI. The Limitation Act has prescribed the period of limitation for!arious contracts: ,or example" period of limitation for eFercising right to reco!er animmo!able property is twel!e years and right to reco!er a debt is three years. After the eFpiryof this limitation period" the contractual rights Cannot be enforced. #n other words" if a debt isnot reco!ered within three years of its payment becoming due" the debt becomes time barredand is discharged by lapse of time.

D*SC/A#%E 7 -E#A"*! , A

A contract may be discharged by operation of law in the following cases.

Death of the -romisor:Contracts in!ol!ing the personal s$ill or ability of the promisorcome to an end with the death of the promisor.

*nsolvenc: %hen a person is declared insol!ent by Court" he is discharged from hisobligation eFisting at that time. So" if a promisor is declared insol!ent" he is discharged fromhis liability.

&er8er:%hen an inferior right accounting to a party in a contract merges into the superior

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rights accruing to the same party" the earlier contract is discharged. ,or example5 A too$ aland on lease from 2. Subse>uently" A purchases that !ery land. Now A becomes the ownerof the land and the earlier contract of lease stands terminated.

&aterial alteration:#n a written contract if any party ma$es some material alteration in theterms of the contract without the appro!al of the other party" the contract stands terminated.A material alteration is one which !aries the rights" liabilities or the position of the parties assuch" one should note that immaterial alterations" such as correcting the clerical errors or thespelling of a name has no effect on the !alidity of the contract.

D*SC/A#%E 7 *&-SS***"7 , -E#,#&A!CE

&or a contract to be !alid it must be capable of being performed. 2ut sometimes" due to somereasons which are beyond the control of the parties" the performance of a contract becomesimpossible. #n such cases" the contract is discharged on the ground of impossibility of

performance. Section @ of Contract Act pro!ides that an agreement to do an act impossiblein itself is !oid. This rule is based on the principle that law does not recognie the impossibleand what is impossible does not create any obligations.

*mpossiilit ma e of t0o tpes: (i) initial and (ii) s9seF9ent.

*nitial impossiilit:#t means impossibility at the time of ma$ing the contract. %hether thefact of impossibility is $nown or un$nown to the parties" the agreement is !oid ab initio. &oreFample A agrees with 2 to disco!er a treasure by magic. The agreement is !oid due to initialimpossibility.

S9seF9ent or S9pervenin8 *mpossiilit:#mpossibility which arises subse>uent to thema$ing of the contract is called super!ening impossibility. #f the contract was capable of

performance at the time of ma$ing it" but subse>uently because of some e!ent o!er which

neither party has any control/ the performance becomes impossible or unlawful" the contractbecomes !oid and the parties are discharged from their obligations.*t can e noticed that s9pervenin8 impossiilit is different from initial impossiilit. *n

case of initial impossiilit the a8reement is void a+initio 0hile in case of s9pervenin8

impossiilit the contract ecomes void.

Conditions for the contract ecomin8 void

The contract will become !oid on the ground of super!ening impossibility only if thefollowing conditions are satisfied.

The act should ha!e become impossible.

The impossibility should be by reason of some e!ent which the promisor could notpre!ent.

The impossibility should not be self-induced by the promisor#easons for S9pervenin8 *mpossiilit

The performance of a contract may become subse>uently impossible due to any of thefollowing reasons B 8estruction of the Subect +atter" 8eath or


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enefit to e #estored:%hen a contract becomes !oid" any person who has recei!ed anyad!antage under such contract is bound to restore it" or to ma$e compensation for it" to the

person from whom he recei!ed it section @/. &or eFample" A contracts to sing for 2 at aconcert for 3s. 0"444" which is paid in ad!ance" A is too ill to sing. A must refund thead!ance of 3s. 0"444 to 2.D*SC/A#%E 7 #EAC/ , C!"#AC"

%hen a contract is made" the parties to it are eFpected to perform it" unless they are eFcused.#f any party refuses or fails to perform his part of the contract" a breach of contract occurs andthe contract is discharged. #n case of breach the aggrie!ed party is relie!ed from performinghis obligation and gets a right to proceed against the party at fault. A breach of contract mayarise in two ways: i/ actual breach and ii/ anticipatory breach.

Act9al reach: Actual breach of contract may ta$e place either on the due date ofperformance or during the course of performance. &or eFample" A agreed to deli!er 044 bagsof rice to 2 at a certain price on 04th uly. #f A refuses or fails to deli!er the goods on time"there occurs an actual breach. #f the promisor has performed part of the contract and thenrefuses or fails to deli!er the remaining goods" it is also actual breach of contract.

Anticipator reach:Anticipatory breach occurs when the party declares his intention ofnot performing the contract before the performance is due. This intention may be declaredeFpressly or impliedly. &or eFample" A agrees to supply certain goods to 2 on 04th uly.2efore this date A informs 2 that he shall not supply the goods. #f" instead of" eFpresslyinforming 2 about his intention of not performing the contract" A does something whichma$es it impossible for him to performB this will also amount to anticipatory breach. #f in theeFample gi!en abo!e" A sells all the goods before the said date to < at a higher price" thisaction of A clearly indicates his intention. Thus a breach of contract operates a discharge ofcontract. #n case of breach" the aggrie!ed party gets the right to claim compensation ordamages from the defaulter.

QL. Descrie different remedies availale in case of reach of contract?

Ans.

%hen a contract is bro$en by a party" there are se!eral courses of action remedies/ which theother party may pursue. These remedies include:

3escission of the contract

Suit for damage Suit for specific performance

Suit for inunction Suit upon >uantum meruit

#ESC*SS*! , "/E C!"#AC" %hen a party to a contract has refused to perform" or disabled himself from

performing his promise in its entirety" the promisee may put an end to the contract.This is called right of rescission.

#t means setting aside of the contract. #n such a case aggrie!ed party is dischargedfrom all the obligations under the contract.

&or eFample" A promises to supply the furniture 2Is new office on a certain day. 2promises to pay for the furniture on its receipt. A does not supply the furniture on theagreed date. 2 is discharged from the liability of paying the price and can rescind thecontract.

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Thus" in the abo!e eFample 2 shall not only be entitled to rescind the contract but alsoto claim compensation for the damage which he has sustained because of the non-supply of furniture by A on the specified date.

S;*" ,# DA&A%ES

#n the e!ent of breach of contractB the aggrie!ed party besides rescinding the contractcan claim for damages.

8amages are monetary compensation allowed for loss suffered by the aggrie!ed partydue to the breach of contract.

The obect of the court in awarding damages for breach is that the aggrie!ed partymay be put in the financial position which would ha!e eFisted had there been no

breach of contract. The law does not punish a party because he has bro$en a contract but if" by reason of

his wrongful act" the other party has suffered any pecuniary monetary/ loss" the courtwill compel the party in breach to compensate the loss by paying damages to the other

party./ADE7 3E#S;S AE!DAE CASE

#n #ndia" the rules relating to damages are based on the udgement in nglish case of*adley !. 2aFendale.,acts

*Is mill was stopped due to the brea$down of a shaft. *e deli!ered the shaft to 2" acommon carrier" to be ta$en to a manufacturer to copy it and ma$e a new one. * hadnot made it $nown to 2 that delay would result in a loss of profits. 2y some neglecton the part of 2" the deli!ery of the shaft was delayed in transit beyond a reasonabletime.,indin8s

*eld" 2 was not liable for loss of profits during the period of delay as thecircumstances communicated to 2 did not show that a delay in the deli!ery of shaft

would entail loss of profits to the mill. Thus where two parties ha!e made a contract which one of them has bro$en" the

damages which the other party ought to recei!e in respect of such breach of contractshould be such as may fairly and reasonably be considered either arising naturally i.e."according to the usual course of things" from such breach of contract itself.

"7-ES , DA&A%ES

#n case of the breach of contract following different types of damages can be awardedto the aggrie!ed party. They are

)rdinary 8amages Special 8amages

Femplary or uidated 8amages and


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The measure of ordinary damages is the difference between the contract price andthe mar$et price on the date of the breach.

#f the seller retains the goods after the breach" he cannot reco!er from the buyerand further loss if the mar$et falls" nor is he liable to ha!e the damages reduced ifthe mar$et rises.

&or Fample" A contracts to deli!er 044 bags of rice at 3s. 044 per bag on a futuredate. )n the due dates he refuses to deli!er. The mar$et price on that day is 3s.004 per bag. The measure of damages is the difference between the mar$et priceon the date of the breach and the contracted price i.e." 3s. 004-044 U 3s. 04.

S-EC*A DA&A%ES

%hen there are certain special or eFtraordinary circumstances present and theireFistence is communicated to the promisor" the non-performance of the promiseentitles the promisee to not only the ordinary damages but also special damagesthat may result there from.

&or eFample" A" who is a builder" agrees to erect and finish a house by 0 anuaryin order that 2" may gi!e possession of it at that time to C" to whom 2 has

contracted to let it. A is informed of the contract between 2 and C. A builds thehouse so badly that it falls down before 0 anuary and has to be rebuilt by 2. As aconse>uence" 2 loses the rent which he was to ha!e recei!ed from C" and isobliged to ma$e compensation to C for the breach of his contract.

Thus A must ma$e compensation to 2 for the cost of rebuilding the house" for therent lost" and for the compensation made to C.

EE&-A#7 # -;!*"*3E # 3*!D*C"*3E DA&A%ES

They are not proportionate to the actual pecuniary loss sustained by the aggrie!edparty but are inflicted by way of punishment. These are normally awarded in caseof:

A reach of promise to marr5 orron8f9l dishono9r of a cheF9e a anRer.

The measure of damages in case of breach of promise to marry is dependent uponthe se!erity of the shoc$ to the sentiments and goodwill of the promisee.

#n case of wrongful dishonour of a che>ue" the rule is- smaller the amount of theche>ue" larger will be the amount of damages awarded and !ice !ersa.

!&*!A DA&A%ES

Nominal damages are awarded in case of breach of contract where there is only atechnical !iolation of the legal right" but no substantial loss is caused thereby. Thedamages granted in such cases are called nominal because they are !ery small"

say" a rupee. #t may be noted that the aggrie!ed party cannot claim these damages as a matter of

right. #t is always at the discretion of the court whether or not to award nominal

damages.

DA&A%ES ,# DE"E#*#A"*! CA;SED 7 DEA7

#n the case of deterioration caused to goods by delay" damages can be reco!eredfrom carrier e!en without notice. The word IdeteriorationI implies not only

physical damages to the goods but also loss of special opportunity for sale.Case: ilson v. ancashire and 7orRshire #ail0a Compan

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The plaintiff had bought !el!et for ma$ing caps for sale during the spring season.2ut" due to delay in transit" he was unable to utilie it for ma$ing caps for saleduring the season.

#t was held that the fall in !alue of the cloth arri!ed after the season amounted to adeterioration for which the plaintiff was entitled to reco!er damages withoutnotice.

DA&A%ES ,# *!C!3E!*E!CE A!D D*SC&,#"

%hen a party has suffered physical discomfort and incon!enience as a result ofbreach of contract" that party can mo!e a suit for claiming compensation.*owe!er" according to the general rule" the moti!e or the manner of breach do notaffect the measure of the damages.CASE: (/S 3. !D! S.. -A* C.)

*" with his wife and children too$ a tic$et for a midnight train" to be transportedto a particular place where he li!ed. They were" howe!er" transported to a wrong

place and they had to wal$ se!eral miles on a driling night.

* was awarded compensation for incon!enience but nothing for the medicaleFpenses of his wife who caught cold" as this conse>uence was too remote.

*Q;*DA"ED DA&A%ES -E!A"7

Some time" in order to a!oid delay in the assessment and payment of damages" atthe time of formation of contract" the parties to a contract mutually agree tostipulate or specify sum" which will become payable by the party guilty of breach.#f the specified sum represents a fair and genuine pre-estimate of the damagesli$ely to result due to breach" then it is called li>uidated damages.

)n the other hand" if the sum fiFed at the time of formation of contract isdisproportionate to the damages li$ely to occur" the sum is deemed to be a penalty.

The amount is so pro!ided to ensure performance of the contract. ?nder nglish law" li>uidated damages are enforceable but penalty cannot be

claimed. #n #ndia" howe!er" there is no such distinction recognised between penalty and

li>uidated damages. The courts in #ndia allow only Ireasonable. compensationIsection D=/.

S"*-;A"*!S ,# *!"E#ES"

A stipulation for payment of interest in case of default is not in the nature of apenalty" if the interest is reasonable.

#f the court. finds that the rate of interest is eForbitant and is penal in character it

may grant some relief. A stipulation in a bond for payment of compound interest on failure to pay simple

interest at the same rate as was payable upon the principal is not a penalty. 2ut a stipulation in a bond for the payment of compound interest at a rate higher

than that of simple interest is a penalty and the party may be relie!ed against.

Q1@. hat is Q9asi Contracts? Disc9ss its provisions 9nder *ndian Contract Act51KJ2?

A1@.

o%hen one person obtains a benefit at the eFpense of the another and the circumstances

are such that he should" e>uitably" pay for it" the law will compel payment. !en though

there is no contract between the parties.

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oSuch relationships are termed as ;uasi Contracts because although there is no

agreement or contract between them" they are in same position as if there is Contract.

oActually" essentials of !alid Contract are lac$ing" but as circumstances are similar to

Contract" they are termed as ;uasi Contracts.

oThe term ;uasi Contract is deri!ed from the 3oman Law.

o;uasi contracts are not contractual in law" but in fact.

oLaw of ;uasi Contract is also $nown as Law of 3estitution.oThe following are ;uasi Contract

1. Necessaries P 2. 3eimbursement P E. Non-gratuitous PD4G. &inder of oods PD0=. +ista$e or coercion PD,

1) !ecessaries P >K

o #f a person incapable of entering in to a C. or any one whom he is legally bound to

support" is supplied by another person with necessaries suited to conditions of hislife" the person who has furnished such supplies is entitled to be reimbursed fromthe property of such incapable persons.

o &or e.g. A supplies 2" a lunatic with necessaries. A is entitled to be reimbursed from

2Gs property.

o The term JNecessariesG is not defined in #ndian Contract Act: 0D,.

o #t includes articles re>uired to maintain a particular position in which he is.

o JNecessariesG may include goods and ser!ices i.e. teaching" medical ad!ice etc.

2) #eim9rsement:+>L

o

A person who is interested in the payment of money" which another is bound byLaw to pay" and who therefore pays it" is entitled to be reimbursed by the other.

o *owe!er" the following are essential re>uirements.

o The payment must be made such as the other party was bound by Law to pay

o &or e.g. 2roo$Gs wharf Ltd. %as the owner of a wear house. oodman 2ros./

imported certain goods and $ept them in wear house. The goods were stolen withoutany negligence as part of %. the authorities made a demand on % for payment ofcustom duties which % paid. *eld" % could reco!er the amount form . 6 2roo$swharf Ltd. OKs oodman 2ros. P 0ED 7i/ The payment made must be bonafideii/ The payment must be made to another person and not to himself.

&or e.g. A canal Co. owned a canal and was under a statutory duty to $eep the bridgeon the canal under repair. The bridge fell into disrepair and +accles &ieldcorporation+/ called upon canal Co. failed to do so" + repaired the bridgethemsel!es and bring an action to reco!er the amount. *eld" here payment is!oluntary and hence" + cannot reco!er. 6 +acclesfield Corporation !Ks reat Central3ailway P 0E00 7

) !on P %rat9ito9s: +

o %here a person lawfully does anything for another person or deli!ers anything to

him" not intending to do so gratuitously and such other person enoy the benefit

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thereof" the latter is bound who has enoyed/ is bound to ma$e compensation to theformer in respect of" or to restore" the thing so done or deli!ered. 6Sec: - D47

o &or e.g.: - A sa!es 2Gs property from fire. A is not entitled to compensation from 2"

if circumstances show that he intended to act gratuitously.

o *owe!er" the following are the essentials of see: D4

i/ The thing must be done lawfully : &or e.g.: - A managed the property of his

wife and sister-in-law and was under an impression that he will recei!eremuneration. *e was entitled to claim reasonable remuneration.ii/ #t must be by person not intending to act gratuitously B &or e.g.: -


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SPECIAL CONTRACTS

Q1. Explain the Contract of *ndemnit %9arantee 9nder Special Contracts?

A1

C!"#AC" , *!DE&!*"7

&EA!*!%

V The term IindemnityI simply means to ma$e good the loss or to compensate the partywho has suffered some loss.

V The term Icontract of indemnityI is defined in Section 0,= of the #ndian Contract Actas follows:

V HA contract by which one party promises to sa!e the other from loss caused to him bythe conduct of the promisor himself or by the: conduct of any other person" is called acontract of indemnity.H

-A#"*ES

V The person who promises to compensate for the loss is called the Hindemnifier.V The person to whom this promise is made or whose loss is to be made good is $nown

as Hindemnity-holderH or HindemnifiedH.V &or eFample" A contracts to indemnify 2 against the conse>uences of any proceedings

which C may ta$e against 2 in respect of a certain sum of money. This is a contract ofindemnity" *ere A is the indemnifier and 2 is the indemnified.

E!,#CEA**"7

V To enforce such contracts it is necessary that all the essentials of a !alid contract mustbe present. #n case any one of the essential is missing" the contract cannot be enforced.

V Thus if the obect or consideration of an indemnity agreement is unlawful" it cannot

be enforced.V &or eFample" A as$s 2 to beat C" promising to indemnify him against the

conse>uences this cannot be enforced. Suppose 2 beats C and is fined 3s. @44" 2cannot claim this amount from A" because the obect of the agreement is unlawful.

SC-E

V All contracts of insurance eFcept Life #nsurance/ are also contracts of indemnity.V #n an auction sale there is an implied contract of indemnity between the auctioneer

and the person who as$s him to sell goods.V A promise to ma$e good the loss arising from any cause whatsoe!er e.g. fire" perils of

sea" accidents etc. are also considered to be contract of indemnity.

*&-*ED C!"#AC" , *!DE&!*"7

V Section E of the Contract Act implies a duty to indemnity in case a person who isinterested in the payment of money which another is bound by law to pay" has paidthe amount.

V Similarly" in an auction sale there is an implied contract of indemnity between theauctioneer and the person who as$s him to sell goods.

V &or eFample" A" an auctioneer" sold certain goods on the instructions of 2. Later on" itis disco!ered that the goods belonged to C and not 2. So" C reco!ered damages fromA for selling the goods belonging to him. *ere A is entitled to reco!er the

compensation from 2.

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V #n the abo!e case there was an implied promise to compensate the auctioneer for anyloss which he may suffer on account of the defecti!e title of 2.

#*%/"S , *!DE&!*"7 /DE#

V #n pursuance of Section 0,@ of the Act the indemnity-holder may reco!er from theindemnifier promisor/" the following amounts" pro!ided the acts within the scope ofhis authority :0. *e is entitled to reco!er all damages which he may be compelled to pay in any

suit in respect of any matter to which the promise to indemnify applied.,. *e is entitled to reco!er from the indemnifier all costs which he had paid in

bringing or defending any suit in respect of contracts of indemnity. #n bringing ordefending the suit the indemnity-holder must not contra!ene the orders of theindemnifier and he must act in the same way as a prudent man would ha!e actedunder similar circumstances in his own case.

. *e is entitled to reco!er from the indemnifier" all the amount which he had paidunder the terms of the compromise of such suit. *owe!er" it is essential that thecompromise must not be contrary to the orders of the indemnifier and in

compromising the suit" he must act as a prudent man. This right is also a!ailableto the indemnity-holder when he paid any amount under any compromise enteredby him and authoried by the indemnifier.

*!DE&!*,*E#IS *A**"7

0. An important >uestion in this connection is when does the indemnifier becomeliable to pay" or" when is the indemnity-holder entitled to reco!er his indemnity5

,. The indemnity-holder is entitled to abo!e-mentioned rights as soon as his liabilityhas become certain" although lie has himself paid nothing.

. #ndemnity is not necessarily gi!en by repayment after payment. #ndemnityre>uires that the party to be indemnified shall ne!er be called upon to pay.

=. Thus" if the indemnity-holder has incurred an absolute liability" he is entitled toas$ the indemnifier to sa!e him from that liability and pay it off.

@. #n simple words" the liability of indemnifier commences as soon as the liability ofthe indemnity-holder becomes absolute.

C!"#AC" , %;A#A!"EE

&EA!*!%

V According to Section 0, of the #ndian Contract Act" IA contract of guaranteeI is acontract to perform the promise" or discharge the liability" of a third person in case ofhis default.

V The person who gi!es the guarantee is called the surety.V The person in respect of whose default the guarantee is gi!en is called the uired by 2" and if he does not pay you. # will. #t is a contract ofguarantee.

V The primary liability to pay is that of 2 but if he fails to pay" A becomes liable to pay.)n the other hand" if A says to the trader" Hlet him 2/ ha!e the goods" # will sec youare paidH" the contract is one of indemnity and not a contract of guarantee.

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C&-E"E!C7 , -A#"*ES

V A contract of guarantee is an agreement and as such all the essentials of !alid contractmust be present.

V &or instance" the contracting parties should be competent to contract. Suppose in theabo!e-mentioned eFample 2 is a minor i.e." incompetent to contract.

V #n such a situation A would be regarded as the principal debtor and he will becomepersonally liable to pay.

V Thus" the incapacity of the principal debtor does not affect the !alidity of a contract ofguarantee. The re>uirement is that the creditor and the surety must be competent tocontract.

ESSE!"*A ,EA";#ES , C!"#AC" , %;A#A!"EE

V There should be eFistence of a debt" for which some person other than the suretyshould be primarily liable.

V #t is not necessary that the surety should be benefited in respect of consideration.V All the essentials of a !alid contract should be present.V Creditor and surety must be competent i.e." principal debtor need not be competent to

contract.V SuretyIs liability is dependent on principal debtorIs default.V uarantee must not be obtained by misrepresentation.V uarantee must not be obtained by concealment of material facts.

Q2. Distin89ish et0een Contract of *ndemnit and Contract of %9arantee?

A2.

"he points 0hich differentiate the contract of indemnit from 89arantee are 8iven

elo0.

-A#"*ES

#n a contract of indemnity there are only two parties i.e." indemnifier and the indemnifiedwhile in contract of guarantee there are three parties principal debtor" creditor and thesurety.

!. , C!"#AC"S

#n a contract of indemnity there is only one contract" whereas in a contract of guarantee"there are three contracts.

/ *S *AE

#n a contract of indemnity the indemnifier underta$es to sa!e the indemnified from anyloss caused to him by the conduct of indemnifier himself or the conduct of any other

person" while in a contract of guarantee" the surety underta$es for the payment of debts ofprincipal debtor" if the principal debtor fails to pay it.

!A";#E , A***"7

#n a contract of indemnity" the liability of indemnifier is primary and independent" whilein a contract of guarantee the liability of surety is secondary i.e." it arises only on thedefault of principal debtor. The primary liability is that of the principal debtor.

"7-E , *%A"*!

#n a contract of indemnity" indemnifierIs liability arises only on the happening of acontingency" while in a contract of guarantee there is an eFisting duty or debt" the

performance of which is guaranteed by the surety.

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*!*"*A"*3E

#n a contract of indemnity" indemnifier acts independently without any re>uest of thedebtor or the third party" while in a contract of guarantee the surety guarantees at there>uest of principal debtor.

C!SEQ;E!CE

#n a contract of guarantee" if the principal debtor fails to pay and the surety discharge hisdebt" the surety can proceed against the principal debtor in his own right" while in acontract of indemnity" the indemnifier cannot sue the third party in his own name unlessthere is an assignment #n indemnifierIs fa!our. #f there is no such assignment" theindemnifier must bring the suit in the name of indemnified

Q.Explain tpes of %9arantees 9nder *ndian Contract Act5 1KJ2? /o0 can the

contin9in8 89arantee e revoRed?

A.

A guarantee may be specific or continuing.

S-EC*,*C %;A#A!"EE

A specific guarantee co!ers only one transaction or obecti!e" is limited to a certain sumof money and is limited as to time. Any amount paid towards the ad!ance by the

borrower in his debt account with the creditor will go to reduce the guarantorIs liability.

C!"*!;*!% %;A#A!"EE

A continuing guarantee is defined in Section 0,E of the #ndian Contract Act. #t co!ers aseries of transactionsB subect to the limit as mutually agree upon" irrespecti!e of the

payments towards the ad!ance and irrespecti!e of the fluctuations of the balance in thedebtorIs account between debit and credit. %hether a guarantee is a continuing guarantee

or not depends upon the construction of the document. #f there are se!eral documentsco!ering a debt and guarantee" all the documents must be read as whole. #n case ofambiguity in the contract" the nature of the contract is to be determined basing upon thesurrounding circumstances. #n Nottingham *ide Co. !s. 2ottrill it was held that thefollowing words used in a guarantee made the guarantee a continuing one: H*a!ing e!eryconfidence in him" he as but to call on us for a che>ue and ha!e it with pleasure for anyaccount he may ha!e with you and when to the contrary we will write to youH.

#E3CA"*! , "/E C!"*!;*!% %;A#A!"EE

#n the case of a


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specified limit and se!eral ad!ances" not eFceeding that limit in their liability less thecredits" are made" such ad!ances are not each a separate loan but are component parts ofa single loan. #t was also held that when a guarantee is gi!en in respect of such ano!erdraft" it is a continuing guarantee co!ering the running and fluctuating account andsecuring the general debit balance at any time" subect howe!er" to the limit specified.H

&E"/DS , #E3CA"*! , C!"*!;*!% %;A#A!"EE

A continuing guarantee may be re!o$ed in two ways:V by the surety gi!ing notice oral or in writing to the creditor as to future transactions

Section 04/ andV in the absence of a contract to the contrary" by the death of the surety as to future

transactions Section 00/.

#t should be noted that the notice of re!ocation must be gi!en according to the terms ofthe contract. #f the contract of guarantee re>uires three monthIs notice" the surety mustgi!e a three monthIs notice. #n %all +uhammed !s. anpat" it was held that a noticere!o$ing a guarantee gi!en ust a day before the performance of the contract is not

illegal. #f there are more than one surety" the notice must be gi!en by or on behalf of allthe co-sureties. Notices by one co-surety do not determine the guarantee.

The death of the surety terminates his guarantee as to future transaction in the absence ofa contract to the contrary. *is estate is" howe!er bound to all transactions entered into

before the death of the surety. #n se!eral Court decisions it has been held that if theconsideration for the continuing guarantee is one and whole" in that case the guaranteedoes not come to an end by the death of a surety" and the estate of the deceased suretycontinues to be liable for future transaction as well. %here two sureties gi!e oint andse!eral continuing guarantee" the death of one of them does not terminate the liability ofthe sur!i!or.. The lunacy of the surety terminates the guarantee as to future ad!ances.

C!S*DE#A"*! , %;A#A!"EE

HAnything done" or any promise made" for the benefit of the principal debtor" may be asufficient consideration to the surety for gi!ing the guaranteeH.#t is rele!ant to discuss following illustrations in this regard.I2I re>uests IAI to sell and deli!er to him goods on credit. IAI agrees to do so" pro!ided ICwill guarantee the payment of the price of the goods. IC promises to guarantee the

payment in consideration of IAIs promise to deli!er the goods. This is a sufficientconsideration of ICIs promise.IAI sells and deli!ers goods to I2I. IC afterwards" without consideration agrees to pay forthem in default of I2I. The agreement is !oid.

#n a contract of guarantee it is not necessary that all the material facts be disclosed unlessit is in nature of an insurance. #n other words a contract of guarantee is not a contract of?berrimae &idei. The following case aptly describes this.

!D! %E!E#A &!*;S C&-A!7

C engaged < as a cler$ to collect money for him. < misappropriated some of CIs receiptsand failed to account for them. This sum was made good by


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Q. Explain !at9re of S9retTs iailit? hat are his ri8hts?

A.

According to Section 0," the liability of the surety is co-eFtensi!e with that of theprinciple debtor" unless otherwise pro!ided by the contract.

The liability of the surety is normally to the same eFtent as that of the principal debtor.The surety cannot howe!er" be made liable beyond what he had earlier contracted to. Thesurety may howe!er" limit his liability to a part of the entire debt. The eFtent of liabilityof a surety assumes importance when the principal debtor is declared insol!ent.

A reduction in the liability of the principal debtor for eFample" after the creditor hasreco!ered a part of the sum due from him out of his property/ will result in a

proportionate scaling down of the suretyIs liability.

#t has been specifically pro!ided in the contract that the suretyIs liabilit y arises onlywhen the principal debtor is made liable" the surety continues to be liable in the gi!eninstances:

V death of the principal debtorBV discharge of the principal debtorIs liability by operation of lawB andV creditorIs failure to sue the principal debtor within the period of limitation.V release of one of the co-sureties by the creditor.

*&*"A"*! , S;#E"7TS *A**"7

#n the first instance" the guarantee gi!en is restricted to a part of the debt whereas in thesecond instance the guarantee gi!en is for the entire debt subect to a limit.This will result in the following conse>uences:V where guarantee is gi!en for a part of the debt. *ere"


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#i8ht to *ndemnit : According to Section 0=@" in e!ery contract of guarantee there isan implied promise by the principal debtor to indemnify the surety" and the surety isentitled to reco!er from the principal debtor whate!er sum he has rightfully paid underthe guarantee" but no sums which he has paid wrongfully. Thus a surety is entitled to fullindemnification i.e." he can reco!er not only the amount paid to the creditor but also anyinterest thereon/.*owe!er" Section 0=@ lays down certain restrictions as to what the surety can claim.V A surety can claim only that amount which he has actually paid to the creditor.V *e cannot claim amounts paid by him negligently or wrongfully.

#i8hts of s9ret on pament or performance: %here a guaranteed debt has becomedue" or default of the principal debtor to perform a guaranteed duty has ta$en place" thesurety" upon payment or performance of all that he is liable for" is in!ested with all therights which the creditor had against the principal debtor Section 0=4/. *e is alsoentitled to reco!er from the principal debtor whate!er sum he has rightfully paid underthe guarantee" but no sums which he has paid wrongfully Section 0=@/.

S9retTs ri8hts a8ainst the co+s9reties: %hen a surety has paid more than his share ofdebt to the creditor" he has a right of contribution from the co-sureties who are e>uallybound with him in absence of any agreement to the contrary. #f they are bound in differentsums" they are liable to pay e>ually as far as the limits of their respecti!e obligations

permit Section 0=D/. As between co-sureties" there is e>uality of burden and benefit.

IAI" I2I and IC are sureties for a debt due by I8I to II. A restricts his liability to 3s.04"444"2 to 3s.,4"444 and IC to 3s.=4"444. I8I ma$es default to the eFtent of 3s.4"444. #n suchan e!ent" IAI" I2I and IC will be liable to the eFtent of 3s.04"444 each. The position !ariesin case J8I ma$es default to the eFtent of 3s.=4"444. A shall then be liable to pay3s.04"444 and I2I and IC 3s. 0@"444 each.

A suit can be filed to declare that the debtor shall be the person liable to pay debt beforethe payment of principal debt and on the payment of the principal debt the surety will be

placed in the position of the creditor.

QG. Disc9ss the provisions relatin8 to Dischar8e of S9ret 9nder *ndian Contract Act?

AG.

S9ret is Dischar8ed from iailit

#evocation

V A continuing guarantee can be re!o$ed by the surety any time by gi!ing notice tothe creditor. A notice gi!en" discharges the liability of the surety with respect to

all future transactions. *owe!er" the surety will remain liable for thosetransactions prior to the re!ocation.

V 2y death of the surety so far as future transactions are concerned. *owe!er" thesuretyIs liability will not be discharged e!en on his death" in case there is acontract to that effect.

V 2y No!ation - where a new contract substitutes the old contract by which theliability under the old contract stands canceled.

Cond9ct of the Creditor

V Any !ariance made without the suretyIs consent" in the terms of the contractbetween the principal debtor and the creditor" discharges the surety as totransactions subse>uent to the !ariance.

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V The !alidity of a contract of guarantee will not be affected in case there is awritten contract of guarantee and there is no !ariance of the same in writing.

V %here the creditor enters into an agreement with the principal debtor releasinghim from his liability" the surety stands discharged.

The following illustration aptly discusses this.IAI gi!es guarantee to IC for goods to be supplied by IC to J2G JCG supplies goodsto I2G and afterwards I2I becomes embarrassed and contracts with his creditorsincluding CIs/ to assign to them his property in consideration of their releasinghim from their demands. *ere" I2I is released from his debt by the contract withICG and IAI is discharged from his surety ship.

#t has already been discussed that as per Section 0, the liability of a surety is co-eFtensi!e with that of the principal debtor. *ence" if the principal debtor is-discharged from his liability by !irtue of an agreement between him and thecreditor" then the surety also will stand discharged. Another eFplanation for thedischarge of the surety is as follows: As per Section 0=4" the surety can claim

reimbursement from the principal debtor after ma$ing payment to the creditor. #fthe principal debtor is no more liable" then the remedy of the surety will beaffected. This would result in a discharge of his liability.

V %hen the creditor compounds with principal debtor gi!ing him time to pay hisdebt the surety stands discharged.

Accordin8 to Section 1=5 the follo0in8 circ9mstances 0ill lead to a dischar8e of

s9retTs liailit.

- %hen the creditor compounds with the principal debtor.- %hen the creditor agrees not to sue the principal debtor: A contract between the

creditor and the debtor" wherein the creditor agrees not to sue the debtor willdischarge the surety from his liability.

V %here the creditor" by his act or failure to perform his duty to the surety impairsthe remedy a!ailable to the surety against the principal debtor" the surety isdischarged.

V Also" any act of the creditor which by implication releases the principal debtorfrom liability" will discharge the surety from his liability. #n *ewison !s. 3ic$ets"goods were gi!en on hire purchase basis. The payment of the installments wasguaranteed by a third person. %hen the debtor failed to ma$e payment" the

creditor determined the agreement" seied the goods and sued the surety on hisguarantee. #t was held that as the creditor had determined the agreement" thesurety cannot be held liable.

V %here the creditor loses or disposes off" without the consent of the surety anysecurity pledged with him" the surety stands discharged to the eFtent of !alue of thesecurity so lost or disposed.

*nvalidation of Contract

V A guarantee obtained by means of either misrepresentation or concealment ofmaterial fact which the creditor was aware of" at the time of entering into thecontract" in!alidates the guarantee and discharges the surety.

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V %here there is no consideration between the creditor and the principal debtor" thesurety is discharged.

V %here a person gi!es guarantee on the condition that the creditor shall not act uponit until another person oins in as co-surety" the guarantee is not !alid if that other

person does not oin.

Q=. hat is ailment? State the D9ties And #i8hts of ailor And ailee 9nder

Contract of ailment?

A=.

2ailment and uests IAI to $eep the wal$man with himfor two wee$s instead of deli!ering it to him immediately. *ere IAI holds the wal$manas a bailee.

%here the owner retains control o!er the goods there is no bailment. The positionwould be similar if a loc$er in a safe deposit !ault is gi!en by a ban$ to a customeralong with the $ey without which the loc$er cannot be opened.

Classification of ailment2ailments may be forV eFclusi!e benefit of the bailorBV eFclusi!e benefit of the baileeBV mutual benefit of the bailor and the baileeBV gratuitous bailmentB where there is no consideration between the partiesB andV Non-gratuitous bailment or bailment for reward.

The rights and duties of bailor and bailee are contained in Sections 0@4 to 0= of theAct. %e shall first discuss the duties and rights of a bailor.

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D9ties of a ailor

V The bailor is bound to disclose to the bailee faults in the goods bailed" of which the bailoris aware" and that which materially interferes with the use of them" or eFposes the baileeto eFtraordinary ris$s."he follo0in8 ill9stration is relevant in this re8ard:

IAI lends a horse" which he $nows to be !icious" to I2I. *e does not disclose the fact thatthe horse is !icious. The horse runs away. I2I is thrown and inured. IAI is responsible toI2I for the damage sustained.

V #n a contract of bailment" the bailee will ha!e to bear all the ordinary-eFpenses incurred"while the bailor will be responsible for any eFtraordinary eFpenses incurred by !irtue ofthe bailment. #n case of a gratuitous bailment" it is the duty of the bailor to bear theordinary and reasonable eFpenses incurred by the bailee.

V The bailor is responsible to the bailee for any loss sustained by him in the followinginstances:- %here the bailor is not entitled to ma$e the bailment" or to recei!e bac$ the

goods" or to gi!e directions" regarding them.-


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bailment or may reco!er compensation for the loss caused due to unauthoried use ofthe goods.

V The bailee should not miF the goods of the bailor with his own goods" but $eep themseparate from his own goods. %here the bailee miFes the bailorIs goods with those ofhis own with the bailorIs consent" then the bailor and the bailee shall ha!e an interest inthe miFed goods in proportion to their respecti!e shares.

V %here he miFes the goods without the consent of the bailor" two possibilities may arise.- The goods can be separated.- The goods cannot be separated.

- here the 8oods can e separated:%here the goods of the bailor and the baileecan be separated" then they will remain the owners in accordance with theirrespecti!e shares. *owe!er" the costs of separation as well as any damage arisingfrom the miFture will ha!e to be borne by the bailee.

- hen the 8oods cannot e separated:The bailor can reco!er damages from thebailee for the loss of the goods.

V The bailee should not set up an ad!erse title of the goods bailed claiming them to be his.

V The bailee not only has to return the goods bailed but also any accretion to the goods.

#i8hts of ailee

The duties of the bailor are the rights of the bailee.V 8eli!ery of goods to one of se!eral oint bailors of goods. #n the absence of any

agreement to the contrary.

V According to Section 0" if the bailor has no title to the goods" and the bailee" in goodfaith" deli!ers them bac$ to" or according to the directions of" the bailor" the bailee is notresponsible to the owner in respect of such deli!ery.

V According to Section 0D" if a person other than the bailor" claims the goods bailed" thebailee may apply to the court to stop the deli!ery of the goods to the bailor" and todecide the title to the goods.

V According to Section 04" if a third person wrongfully depri!es the bailee of the use orpossession of the goods bailed to him" he has" the right to bring an action against that

party. The bailor can also bring a suit in respect of the goods bailed.

V The bailee is also entitled to reco!er necessary eFpenses incurred on bailment. *e can alsoreco!er compensation from the bailor in case he incurs a loss owing to the defecti!e titleof the bailor.

V 3etain the goods lien/ till his dues are paid" in other words eFercise a general lien. Thebailee may also eFercise a particular lien when the contract re>uires him to use hiss$ills.

%eneral lienentitles the bailee to retain goods of the bailor for a Igeneral balance ofaccountI. *ere" the bailee may retain not only those goods of the bailor in respect of

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which some particular ser!ice has been rendered" but also other goods in the possessionof the bailee belonging to the bailor.

The right of general lien is conferred on ban$ers" factors" wharfingers" attorneys of *ighCourt and policy bro$ers. This right is conferred only to the abo!e specified and noneelse unless there is an eFpress contract to that effect. ,or example:A deli!ers a roughdiamond to 2" a eweller" to be cut and polished which is accordingly done. 2 is entitledto retain the stone till he is paid for the ser!ices he has rendered.

#i8hts of ,inder of %oods

%hen a person finds an article and ta$es it into his custody" he assumes the role of a bailee.*e then has the same responsibilities li$e any other bailee. The rights a!ailable to him are:

V According to Section 0" the finder of goods can eFercise lien o!er the goods till theowner reimburses the eFpenses incurred for the safe custody of the goods.

V %here the owner has announced a reward for reco!ery of the lost article" the finder has

the right to retain the goods till he recei!es the award.

V The finder has a right to sell the article:- if the owner cannot be found pro!ided the bailee has made reasonable effortsB

- if the owner refuses" upon demand" to pay the lawful charges of the finderB

- the article is of perishable nature or that which loses most of its !alue with passageof timeB or

- if the lawful charges of the finder in respect of the goods found" amount to two

thirds of their !alue.

Q>. hat is -led8e? State the #i8hts and D9ties of -a0nee and -a0nor?

A>.

According to Section 0D," bailment of goods as security for payment of a debt orperformance of a promise is called HpledgeH. The bailor is" in this case" called theH


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held that when certain mo!ables were pledged with a ban$" the same could not besold to meet the liability of other creditors" unless the claim of the ban$ was fullysatisfied.

V The owner of the goods or any person authoried mentioned below by him in thatbehalf can pledge the goods.V A mercantile agent.V A person in possession under a !oidable contract.V A person with a limited interestV A seller in possession after saleV A buyer in possession after sale.

uires a good title to thegoods pro!ided he acts in good faith and without notice of the pawnorIs defect ofthe title.

#i8hts and D9ties of -a0nee

V The pawnee has a right to retain the goods not only for payment of the principaldebt or for performance of a promise but also for any eFpenses incurred or interestaccrued thereon.

V The pawnee can sue the pawnor to reco!er from him any eFtraordinary eFpensesincurred by him for the preser!ation of the goods pledged.

V %hen the goods pledged ha!e been obtained by the pawnor under a !oidablecontract and where such contract has not been rescinded at the time of pledge" the

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pawnee ac>uires a good title to the goods" pro!ided he has acted in good faith andhas no $nowledge of the defecti!e title.

V %hen the pawnor defaults in payment of debt or fails to perform his part of thepromise" the pawnee can

- initiate a suit against the pawnorB- retain the goods as a collateral securityB- sell the goods pledged after gi!ing the pawnor a reasonable notice of

saleB and- reco!er from the pawnor any deficit between the debt due and sale

price.

#i8hts and D9ties of -a0nor

V The pawnor can get bac$ the goods pledged on his performance of promise orrepayment of loan and interest.

V #n case the pawnor ma$es default in payment" he can still pay the pledged amountand redeem the goods pledged at any subse>uent time. *owe!er" he can eFercisehis right to redeem only before the pawnee has made an actual sale of the goods.The right to redeem the pledged goods will be in!alidated when the pawnee sellsthe goods in eFercise of his right under Section 0D.

V The right of redemption of goods also includes a right to any accretion to the goodspledged. &or eFample" if shares are pledged and during that period the companyissues bonus and right shares" then the pawnor will be entitled to the same onredemption.

V The pawnor can o!ersee whether the pawnee preser!es and maintains the goods

properly.

V The pawnor has rights of an ordinary debtor which he has ac>uired by !ariousstatutes for the protection of debtors.

QJ. hat is ien? Disc9ss its tpes?

AJ.

Lien is the right of a person usually the creditor/ to retain the possession of the goodsand securities belonging to another person the debtor/ till the amounts due to him fromsuch owner are fully realied. The lien can be defined as HThe right to retain the lawful

possession of the property of another until the owner fulfills a legal duty to the person

holding the property" such as the payment of lawful charges for wor$ done on theproperty. A mortgage is a common lienH.

A lien has udicially been defined as Ha right in one man to retain that which is in hispossession belonging to another until certain demands of the person in possession aresatisfiedH.

#n its widest meaning the term HlienH includes e!ery case in which real or personalproperty is charged with the payment of any debt or dutyB e!ery such charge beingdenominated a lien on the property. #n a more limited sense it is defined to be a right ofdetaining the property of another until some claim be satisfied. &or eFample: Thetransporter of goods retains the possession of the goods that he has carried to the

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destination till the amount of freight is paid to him. The tailor retains the dress stitched byhim till the ser!ice charges for ma$ing the dress is paid to him.

The right of eFercising Lien may arise in three ways:V 2y eFpress c

legal aspects of business digest

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